3 A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 5%. The characteristics of the risky funds are as follows: 10 points Stock fund (S) Bond fund (B) Expected Return 22% 12 Standard Deviation 38% 16 The correlation between the fund returns is 0.10. eBook What is the Sharpe ratio of the best feasible CAL? (Do not round intermediate calculations. Enter your answer as a decimal rounded to 4 places.) Print Sharpe ratio 0.5968 References SI 3 10/10 points awarded Explanation The proportion of the optimal risky portfolio invested in the stock fund is given by: Scored Ws [Elrs) - rf] x o2 - [Eirb) - rf] * Covers,rb) [E(rs) - rf] x o2 + [E{rB) - rf] xos2 - [Elrs) - rf + E(rp) - rf] x Covers, rb) eBook [(0.22 - 0.05) * 256.00] - [(0.12 - 0.05) * 60.80] [(0.22 - 0.05) x 256.00] + [(0.12 - 0.05) x 1,444.00] - [(0.22 - 0.05 + 0.12 - 0.05) x 60.80] = 0.3020 Print WB = 1 - 0.3020 = 0.6980 References The mean and standard deviation of the optimal risky portfolio are: Erp) = (0.3020 x 0.22) + (0.6980 x 0.12) = 0.1502 Op = [(0.30292 x 1,444) + (0.69892 x 256) + (2 x 0.3020 * 0.6980 61)]1/2 = 0.1679 The reward-to-volatility ratio of the optimal CAL is: Erp) - rf Op 0.1502 -0.05 0.1679 = 0.5966